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Principal Risks

The materialisation of the principal risks could have an adverse effect on the Group’s results or financial condition. If more than one of these risks occur, the combined overall effect of such events may be compounded.

The chart below shows management’s assessment of material risks. Various strategies are employed to reduce these inherent risks to an acceptable level. These are summarised in the tables at the bottom of this page.

The effectiveness of these mitigation strategies can change over time, for example with the acquisition or disposal of businesses. Some of these risks remain beyond the direct control of management. The risk management programme, including risk assessments, can therefore only provide reasonable but not absolute assurance that risks are managed to an acceptable level.

The Group faces many other risks which, although important and subject to regular review, have been assessed as less significant and are not listed here. These include, for example, natural catastrophe and business interruption risks and certain financial risks.

Risks to the drivers of profitable growth
The symbols shown at the bottom of this page are displayed alongside each risk on the following pages to indicate which of the strategic drivers of growth are most threatened by that risk.

The drivers of profitable growth are described here

A: New competitors and technology

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
High

 

Trend
No change

ddd

Wholesale and distribution businesses in other industry sectors have been disrupted by the arrival of new competitors with lower-cost transactional business models or new technologies to aggregate demand away from incumbents.

 

The Board is attuned to both the risks and opportunities presented by these changes and is actively engaged as the Group takes action to respond.

Ferguson Ventures has continued its partnerships with, and investments in, a range of technology companies that are operating in our markets and solving industry problems, and participating in new business models. During the year, we set up the Ferguson Ventures Innovation Lab (based in Atlanta, Georgia), which is focused on exploring areas of innovation and disruption by evaluating consumer and industry evolution in technology and service design.

 

In addition, during the year, our businesses have adopted next generation technology and the latest digital tools in order to improve customer service and effective information sharing (for example, the Group’s deployment of Microsoft’s Teams platform and a shift to channelbased communications).

The Group develops and invests in new business models, including e-commerce, to respond to changing customer and consumer needs. This will allow the Group to accelerate the time to market for new revenue streams and gain insight on new disruptive technologies and trends.

 

The Group remains vigilant to the threats and opportunities in this space. The development of new business models in our market place is closely evaluated – both for investment potential and threats.

B: Market conditions

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level

High

 

Trend

Higher

ddd

This risk relates to the Group’s exposure to short-term macroeconomic conditions and market cycles in our sector (i.e. periodic market downturns).

 

Some of the factors driving market growth are beyond the Group’s control and are difficult to forecast.

This risk has increased during the year as US market growth moderated in the second half.

 

The Group has maintained a strong balance sheet throughout the year and other measures have been taken to manage the cost base in line with forecast growth.

 

The Group has again tested its financial forecasts, including cash flow projections, against the impact of a severe market downturn.

 

The UK’s withdrawal from the European Union continues to create a level of uncertainty affecting the UK economy, although this is not expected to have a material impact on the Group.

The Group cannot control market conditions but believes it has effective measures in place to respond to changes. Ferguson continues to reinforce existing measures in place, including:

 

– the development of our business model;

 

– cost control, pricing and gross margin management initiatives, including a focus on customer service and productivity improvement;

 

– resource allocation processes; and

 

– capital expenditure controls and procedures.

C: Pressure on margins

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
High

 

Trend
No change

ddd

The Group’s ability to maintain attractive profit margins can be affected by a range of factors. These include levels of demand and competition in our markets, the arrival of new competitors with new business models, the flexibility of the Group’s cost base, changes in the cost of commodities or goods purchased, customer or supplier consolidation or manufacturers shipping directly to customers.

 

There is a risk that the Group may not identify or respond effectively to changes in these factors. If it fails to do so, the amount of profit generated by the Group could be significantly reduced.

Pressure on margins remained high during the year, primarily due to levels of competition.

 

In response, the Group has continued to manage its cost base in line with changes in expected growth rates. Business unit performance, including margins achieved, were monitored on a monthly basis throughout the year.

 

Ongoing gross margin was 10 basis points ahead in 2018/19 with growth driven by improved product mix and procurement efficiencies.

The Group’s strategy for tackling this issue remains unchanged. This includes continuous improvements in customer service, product availability and inventory management. Revenues from e-commerce, own brand, and other growth sectors continue to grow and the Group has made acquisitions in these areas during 2018/19.

 

The performance of each business unit is closely monitored and corrective action taken when appropriate.

 

Resource allocation processes invest capital in those businesses capable of generating the best returns.

D: Information technology ("IT")

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
High

 

Trend
Unchanged

ddd

Technology systems and data are fundamental to the day-to-day operations and future growth and success of the Group. The Group is increasingly dependent on sophisticated information technology and infrastructure. IT risks are categorised as strategic and operational.

 

Strategic risks are threats that could prevent execution of the IT strategic plan such as inadequate leadership, poor allocation/management of resources and/or poor execution of the organisational change of management necessary to adopt and apply new business processes.

 

Operational risks include business disruption resulting from system failures, fraud or criminal activity. This includes security threats and/or failures in the ability of the organisation to operate, recover and restore operations after such disruptions. While cyber security threats have resulted in minimal impact to date, this risk continues to persist and evolve.

IT risks have remained material and are being closely monitored as we implement the clearly defined global technology strategy and roadmap.

 

Under the management of the Chief Information Officer, the Group has made progress in implementing its technology strategy and roadmap, including commencing significant upgrades to its enterprisewide resources planning systems.

 

IT General Controls were independently tested by Internal Audit and findings reported to the Audit Committee. This process now falls under the normal Internal Audit Committee reporting throughout the year.

 

Briefings on the status of the Group’s IT strategy, and its implementation have been provided to the Board, the Audit Committee and the Executive Committee throughout the year.

 

Regular Board update checkpoints have been established to provide monitoring and oversight of execution of the IT strategic plan.

Business leadership is implementing a comprehensive change management programme designed to transition current business practices and norms to adopt new business capabilities.

 

A Business Technology Centre of Excellence is in place to drive organisational discipline around the prioritisation of business projects to ensure alignment with Ferguson’s strategic framework.

 

Implemented a rolling three-year roadmap of investments in processes, resources and technical defences necessary to continuously address emerging security threats.

 

Group-level compliance processes continue to remain in place.

 

Disaster recovery systems, secondary data centres, resources and processes have been implemented to ensure business critical systems are recoverable in the event of a major disaster. Testing of critical infrastructure and application systems are in place and have been consistently executed across the Group.

 

Insurance coverage is in place, including data protection and cyber liability.

E: Health and safety

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
Medium

 

Trend
No change

ddd

The nature of Ferguson’s operations can expose its associates, contractors, customers, suppliers and other individuals to health and safety risks.

 

Health and safety incidents can lead to loss of life or severe injuries.

The Group’s strategic plan is focused on the elimination and control of risks causing disabling injuries, improving our safety culture and closing the safety, health and environmental knowledge gap among our associates. The hiring and deploying of health and safety professionals in the field provides businesses with technical resources to more effectively mitigate risk. Our efforts in these areas have improved the overall performance of the Group.

Health and safety is a fundamental value in our organisation. Our leaders have specific roles to play and are required to actively engage with our associates in ensuring a healthier and safer workplace. Our performance is reported and discussed at both the Executive Committee and Board meetings.

 

The Group maintains a health and safety policy, with detailed minimum standards, and standard operating procedures which sets out requirements for all businesses. Branches are audited against these standards and businesses are implementing fundamental changes to transform our culture. 

F: Regulations

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
High

 

Trend
Lower

ddd

The Group’s operations are affected by various statutes, regulations and standards in the countries and markets in which it operates. The amount of such regulation and the penalties can vary.

 

While the Group is not engaged in a highly regulated industry, it is subject to the laws governing businesses generally, including laws relating to competition, product safety, data protection, labour and employment practices, accounting and tax standards, international trade, fraud, bribery and corruption, land usage, the environment, health and safety, transportation and other matters.

 

Violations of certain laws and regulations may result in significant fines and penalties and damage to the Group’s reputation.

 

There has been no major change in the level of regulation applying to the Group this year. Following the adoption of GDPR, the procedures and controls implemented by the relevant businesses within the Group to ensure compliance were reviewed and improvement measures put in place.

 

The Group’s Code of Conduct was updated during the year and is focused at clearly setting out the standards that are expected from our associates. This includes the commitment to strict compliance with the various laws and regulations that apply wherever the Group operates.

 

The Group monitors the law across its markets to ensure the effects of changes are minimised and the Group complies with all applicable laws.

 

The Group aligns Company-wide policies and procedures with its key compliance requirements and monitors their implementation.

 

Briefings and training on mandatory topics and compliance requirements including anti-trust, anti-bribery and corruption are undertaken.

G: Talent management and retention

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
Medium

 

Trend
No change

ddd

As the Group develops new business models and new ways of working, it needs to develop suitable skillsets.

 

Furthermore, as the Group continues to execute a number of strategic change programmes, it is important that existing skillsets and talent are retained.

 

Failure to do so could delay the execution of strategic change programmes, result in a loss of “corporate memory” and reduce the Group’s supply of future leaders.

There has been no material change in the level of associate turnover during the year.

 

Kevin Murphy, the US CEO, will succeed John Martin as Group Chief Executive on 19 November 2019.

 

Talent management procedures were reviewed during the year.

 

 

All of the Group’s businesses have established performance management and succession planning procedures. Reward packages for associates are designed to attract and retain the best talent.

 

A new talent review process was launched across the Group to be aligned with our organisational strategy.

 

The Group continues to invest in associate development.

H: Macro political tax risk

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
High

 

Trend
No change

The wider macro political and economic situation is uncertain in some of the territories in which Ferguson operates and changes could adversely impact the Group’s business as well as the Group’s future tax rate. A combination of growing international trade pressures, including trade-related actions taken by the USA and China and rising debt levels, is creating political and regulatory uncertainty which could lead to changes in the prevailing tax regime and adversely impact the Group’s results.

The Group’s headquarters were relocated from Switzerland to the UK which facilitated the continued simplification of the Group’s corporate structure in line with its strategy.

 

Group Tax continues to allocate resources to ensure the macro political uncertainties are being appropriately monitored and mitigation plans updated when the need arises.

The Group is engaged with the relevant tax authorities to proactively assess any proposed changes in tax policy.

 

Once policy changes are fully assessed the Group will ensure any changes are reflected in Ferguson’s tax strategy.

 

The Group assesses, and takes appropriate action to respond to, the impact of the introduction of, and/or change to, customs duties and tariffs on imported products.